Archive for April, 2011

I’m not following the trial of hedge fund manager Raj (“King”) Rajaratnam very closely, and I have no unique insight into the case other than what I read in the press. To me, the wiretap evidence incriminating “the king” appears overwhelming. The defense’s strategy suggesting it was all “public information” is insulting to common sense, much less to market professionals.

But I’m interested to explore questions beyond guilt or innocence, questions far more pertinent to the global economy and to society at large at this critical historical juncture when the entire practice of finance is on trial. Specifically,

How should the Simon School of Business Administration at the University of Rochester respond to finance professor Gregg Jarrell’s role as expert witness for the defense in this historic insider trading case in which Jarrell reportedly earned $1million for his troubles?

What more radical responses are available for public consideration to materially shift the corrupted Wall Street casino in order that capital can again flow to productive use at a time when it is so desperately needed?

Regarding the first question, I understand “innocent until proven guilty” and the ideal that our legal system provides all accused a fair trial. But the good intentions to protect individuals against an all-powerful State have been corrupted by the legal armies and clever consultants available to powerful corporations and billionaires. “Fair trial” in a democracy does not equate to the “best defense money can buy.” The burden such battles place on the State and the taxpayers is clearly not in the public interest, but a solution to this problem eludes me.

However, the decision to be complicit in this system is one that individuals, firms, and institutions are free to make for themselves. I’ve always been troubled by lawyers who represent criminals that they know are guilty when there’s enough money involved. But in fairness to lawyers, even guilty defendants need expert counsel to negotiate fair settlements when facing aggressive prosecuting attorneys in a world rife with stories of abuse.

The one I struggle with is the Simon Business School’s finance professor Gregg Jarrell’s willingness to support the defense’s case by conducting “event studies”[1]that seek to validate the defense’s position that the inside information Rajaratnam traded on was not “inside” after all, but already in the public domain. In my opinion, the analytical complexity of these “event studies” is a disingenuous smoke screen for the basic questions of the case, raising serious ethical questions for the Simon School of Business worse than the unsavory issues raised for the economics profession broadly in the Academy Award winning documentary Inside Job.

Professor Jarrell’s $1 million engagement cynically supporting Rajaratnam’s defense in the most far reaching insider trading case in history that has already seen 20 significant guilty pleas at this moment in time with Wall Street rightfully discredited is wrong. By association, Jarrell’s engagement demeans the University of Rochester’s reputation.

I did a little homework on professor Jarrell and discovered he’s no slouch, having set the record at the University of Chicago for shortest time to earn a PhD. He’s also a former chief economist at the SEC during the Reagan years in what appears to be an ideological appointment early in the deregulation movement.

Although he may have rushed through the halls of the University of Chicago, he did pay attention, once saying, “Most regulations hurt more people than they help.” There is a school of thought that says there is no such thing as “inside information,” and government should take a laissez-faire approach to market surveillance. Perhaps this helps explain why Professor Jarrell describes himself as “frequently serving as an expert witness on … criminal inside trading cases,” no doubt using his “event studies” as a tool to obfuscate black and white criminal behavior such as what was recorded by multiple wire taps in the Galleon case.

The University of Rochester’s Simon Business School website boasts its “History of Remarkable Achievement” since its founding in 1958, declaring in part:

As a result of pioneering work by Meckling and Michael C. Jensen, one of the talented young faculty members he recruited, and groundbreaking work by other faculty members, the School became known for making enormous contributions in the critical areas of finance, accounting and organizational theory. The faculty’s contributions, in turn, helped shape the research agenda of a generation of business scholars around the globe, influencing teaching in graduate business programs and forever changing how many companies and executives in this country and abroad conduct business.

It would appear that Professor Jarrell’s “event studies” are intended to be part of the “faculty contributions forever changing how executives in this country and abroad conduct business.”

I wonder if this is the brand of free market capitalism William E. Simon, former Secretary of the Treasury, had in mind when he put his name on the University of Rochester’s business school back in 1986. No doubt Mr. Simon, Milton Friedman and Ronald Reagan all understood that markets are not free when they are not fair.

Maybe speed is not a virtue when it comes to a Finance PhD.

I will address my second question in a future post.

[1] Event studies are statistical studies intended to show how stock prices respond to specific events, in contrast with normal market conditions.

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